Top Year End Financial Planning and Tax Tips
The decorations are up.
The holiday marketing campaigns are in full swing.
People are becoming more edgy by the day…
Yup, the holidays are coming – so why not get some top year end financial planning and tax tips while you’re at it!
All jokes aside I’m very much looking forward to the holidays!
While I certainly intend to enjoy some much-needed down time away from work, I also believe December is a great time to start thinking about ushering out some old financial habits and bringing in some new, improved financial planning practices and tax tips it comes to our personal finances.
On that note, here are my top year end financial planning and tax tips for this year!
Top Year End Financial Planning and Tax Tips
Oh, and you don’t have to take my word for it. This year, I’ve enlisted some tax tip help. My friend Neal Winokur (a not-so-grumpy in reality accountant) and author of The Grumpy Accountant is back with me to share those financial planning and tax tips for you too.
And keep reading…
At the end of this post, Neal is kind enough to help Canadians with The Grumpy Accountant better navigate our complex Canadian tax system – by offering all My Own Advisor readers a huge discount off The Grumpy Accountant from his site.
Neal, welcome back to the site and thanks very much for that major discount to My Own Advisor readers. I hope many Canadians tax advantage of your book for tax tips.
Thanks Mark, a pleasure to help!
Neal, let’s start with our first tax tip question: should investors consider realizing a capital loss? If so, when and how does that work?
In the past I’ve sold some non-registered investments during the tax year. When I did that, I needed to calculate my capital gains or losses on any transaction. When disposing of a security, the sale will be deemed to have taken place on the settlement date and assuming you have a two to three-day settlement period which is common with most discount brokerages, to employ a “tax loss” selling strategy, you must make sure your transaction(s) settle no later than December 27. Thoughts?
Capital loss farming! A favourite Canadian pastime before December 31st! I should first mention that those considering doing this should ensure they execute the trade with enough time for it to settle by December 31st to realize the loss in the current year – to your point above Mark.
In order to decide on whether this is a good idea or not, I would tell people “don’t make investment decisions based on tax considerations!” If you’re holding a particular stock and you have an unrealized loss, if you believe the stock will continue to decrease in price, then why would you hold on to it? And if you believe the stock will increase in price, why would you sell it! It’s true you can buy the stock back after selling it, but you must wait at least 30 days. Otherwise, the CRA will deny the capital loss! And what happens in those 30 days is anyone’s guess.
Look at what happened over the past two years with COVID. Nobody could have predicted any of this (market return) and nobody predicted the stock market would reach all-new highs during the pandemic. (Thank you to the U.S. Federal Reserve and your zero-interest rate policies and “quantitative easing”!).
All kidding aside to some degree, my point is – the markets are completely unpredictable. Selling a stock for tax purposes makes no sense to me. It only makes sense if you were going to sell the stock anyways. But if you want to hold on to the stock because you are earning and reinvesting dividend income, why would you sell? In conclusion, don’t make investment decisions based on tax considerations! The flipside of this question also arises when people ask, “I have a large unrealized gain on a particular stock, and I really want to sell the stock but I’m reluctant to because I’ll have to pay tax.” Well, if you want to sell the stock, sell it! If you think it will go down, why hold on to it and lose all your money. Don’t make investment decisions based on purely tax considerations!
Such great points. Neal, what are your favourite tax tips to be efficient in any tax year? An example may include when to take RRSP withdrawals, at the lowest possible tax rate I assume?
You bet Mark.
To be tax efficient in any particular year, there are many things that can be done. Firstly, always trying to maximize one’s TFSA contributions is a no-brainer. I know you write about this often.
I’ve maxed out my RRSP and TFSA. Now what? How should I invest?
Secondly, if you were thinking of withdrawing from your RRSP, then, of course, wait until you are in a year in which you have zero or a low amount of other income.
Remember if you want to claim the RRSP deduction for the 2021 tax year, you must contribute to your RRSP by February 28, 2022.
Simple and smart. OK, what about making a charitable donation – can that lower your taxes owing and if so, how?
Yes, the charitable donation tax credit is one of the most popular tax credits out there. I cannot tell you how many emails I receive in December from every charity in the country asking for donations. They know people love getting their donation tax receipts so they spam everyone as close to the end of the year as possible! By the way, if you want to check your preferred charities to see how much money they spend on administrative expenses versus actual operations, you can look it up on the CRA website! Can you believe it? The CRA is good for something!
Here is the link:
Generally speaking, the higher your income is, the more the donation tax credit will be worth to you. If you are in the highest tax bracket in Ontario each dollar you donate to a registered charity will save you 53.53% of tax. But the total amount you are allowed to claim in a year is limited to 75% of your net income. Unclaimed amounts can be carried forward for five years.
As an aside, I sometimes wonder if the government abolished all forms of forced taxation and asked for voluntary donations instead, and each government department did their own GoFundMe Campaign and disclosed their expenses online, would people donate? Honestly, I think they would! But who knows!
OK Neal, a follow-up. What about donating shares from a taxable account? Is that also a good way to make a financial donation and how does that work?
If you hold publicly traded shares with an unrealized capital gain in a non-registered account, donating those shares directly to a registered charity can be extremely tax-effective. You will receive a donation tax receipt for the fair market value of the shares on the date of the donation. In addition, the capital gain will be completely exempt from tax! So, this is a great way to realize some tax savings and contribute to the fine work that Canadian charities do.
Let’s look ahead. When should investors consider making their TFSA contributions? Early in the year? What are your thoughts on lump-sum investing and DCA (dollar cost averaging)?
People should make their TFSA contributions as soon as humanly possible. The second you wake up on New Years Day before even wishing good morning to your spouse or other loved ones, before preparing your coffee to cure your New Years Eve party hangover, before even going to the bathroom and brushing your teeth and relieving yourself, go to your computer, login to your bank account online and make your TFSA contribution! Do not delay! Time value of money!
Remember, money is worth more to you today than it is tomorrow. So, the longer the money is invested, the more returns you will earn over the long term due to compound investing. Of course, I urge you to double, and triple check your TFSA contribution room before contributing. The amount showing on the CRA’s website could be out of date. I recommend everyone keep a spreadsheet where they record every contribution and withdrawal. You can also look at your December TFSA statements to see the “year-to-date” withdrawals and contributions each year to verify your contribution room. For 2022, the new contribution limit will be $6,000. This remains unchanged and has been $6,000 for 2019, 2020 and 2021. I guess the government thinks there has been no inflation since 2018!
In terms of lump-sum investing and dollar-cost averaging, both have their place. Lump-sum investing is great due to the time value of money and the effects of compounding over the long-term as I described above. Dollar-cost averaging is great too especially if you like automatic dividend reinvestment programs (DRIP). Generally speaking, if you have a very long-term investment horizon and can tolerate more risk, it’s likely beneficial to have as much money invested as soon as you can. The longer the money is invested, the better! But dollar-cost averaging can you serve people as well if you are setting aside a portion of your income every month for investment purposes. Both strategies can be used in conjunction with each other.
Totally agree – lump-sum investing is usually the way to go. Neal, running My Own Advisor takes some work – including my incorporation efforts. What incorporation or small business organizational work would you recommend at year-end?
Is that a trick question? Whether one is incorporated or a sole proprietor, organizational work must begin BEFORE year-end!!! I cannot stress this enough. In my accounting firm, RealtyTax.ca, we insist that all our clients use our monthly bookkeeping system. If are you waiting until the end of the year to begin organizing your accounting and tax information, it’s too late!!! Develop a system for yourself using any of the gazillion online apps and tools available to help automate your bookkeeping or hire a professional to do this for you. Sole proprietors should ensure they are tracking all their revenue and all their expenses throughout the year. Every receipt for every expense should be kept, whether a paper copy or a scanned copy. If one is collecting GST/PST/HST, one should keep track of that as well and set aside the sales tax that they collect. One should also set aside a portion of all their revenue to pay their income tax when the time comes.
Incorporated business owners have an even greater compliance burden. In addition to all the requirements listed above for sole proprietors, these business owners must also track every transaction going through the corporate bank account in order to prepare a “balance sheet” at the end of the year. The T2 corporate tax return requires taxpayers to fill in both a balance sheet (Schedule 100) and an income statement (Schedule 125). All withdrawals the owner of the corporation makes and all deposits an owner puts into the corporation must be tracked as well. This is known as “shareholder loans”. Any withdrawals by the owner for personal use must be recorded as salary or dividend to the owner. Salaries must have Canada Pension Plan (CPP) and income tax withholdings and payments to the CRA. Dividends can be complicated to calculate due to the gross-up and dividend tax credit. Salaries must be reported on a T4 slip and dividends on a T5. Complying with all these requirements is no easy feat! This ridiculous complexity is my pet peeve and causes me much anguish and is the reason why I wrote The Grumpy Accountant. Due to all this work involved for corporate owner-managers, I highly recommend ensuring your books are being kept up to date throughout the year! Have the bookkeeping done monthly, including monthly bank reconciliations and credit card reconciliations. The fees are well worth it because if you have a good tax advisor, they can do proper tax planning for you throughout the year, pre-emptively BEFORE the end of the year! This is so important.
Now all that being said, if you haven’t done any of the above, and you have a shoebox of receipts, well, good luck to you! But it’s never too late to start and get organized. Use an app like Dext to scan in all your receipts or get yourself QuickBooks Online and connect your bank account and find someone who can help you learn how to use it or hire a professional.
Further reading with Neal and Mark:
Finally, any other words of wisdom for Canadians to be tax savvy this year and leading into a new year?
For the 2021 tax year specifically, remember to claim the home office deduction if you were working from home. The simplified method that was created in 2020 is being continued for 2021 as well. If you received covid benefits like CERB, CRB, CRSB, CRCB, these are TAXABLE and you will receive a T4A slip from the wonderful government. The amounts on the T4A slips must be reported in your income. Any income tax deducted at source from these benefits will also show up on the T4A slip and remember to include that in your tax return as well so you get credit for those income taxes already paid. If you owe additional tax due to receiving these benefits and cannot pay the tax bill by April 30th, 2022 for 2021, the CRA will likely offer interest relief for 12 months if your income was below $75,000, the same way they did for 2020. I have not yet seen a formal announcement on this but I would assume they will extend this for the 2021 tax year as well but we have to wait for them to release more information.
We just came out of an election campaign where there were many expensive promises made by the Liberal party who has now formed a minority government. We have to wait and see for actual legislation to be passed to see if there will be any major changes to our tax system in the coming months.
Top Year End Financial Planning and Tax Tips Summary
A big thanks to Neal Winokur from me, CPA, who started his practice in 2013 and his grumpiness has grown ever since – although he’s actually a very great guy – for his contributions again to the site.
Neal is an active blogger, several of his articles have been published in the National Post. Neal feels a moral obligation to speak out against the inherent flaws, unfairness and needless complexities that define Canadian tax. His dream is for the Canadian tax system to be massively simplified to the point where his job as a tax accountant would no longer exist. His wife won’t be happy but as taxpayers Neal feels we’ll be all better off!!!
Some other year end tax tips or considerations from Neal:
- Revisit your asset allocation and location. While you don’t want the tax tail to wave the investment dog, asset location – what assets should go inside what accounts to be tax efficient – is also important to consider.
- Review your insurance coverage. Every fall/winter, I get letters from my combined home and auto insurance company to highlight new or changed premiums to be paid. I’m not thrilled about any insurance premium increases mind you, but rates in general are always going up over time. So, upon renewal letters, I think it’s a great time to review your insurance coverage – ensuring you’re getting the right coverage for your valuable buck.
- Collapse your RRSP and turn that into a RRIF. I hope you know from my site that the use of the RRSP is an outstanding tax-deferred account for wealth-building. If you are turning or turned age 71 this year, you must collapse this account by December 31st in the year you turned 71. By turning your RRSP into a RRIF, you can continue to get the tax-deferred growth benefits for assets inside the RRIF while some forced withdrawals slowly take place over time.
- Make some RESP contributions! A Registered Education Savings Plan (RESP) is an outstanding way to save for a child’s or grandchild’s post-secondary education. Your child or grandchild, as the beneficiary, can receive up to the lifetime contribution limit of $50,000 – and that’s just contribution room! Just by making RESP contributions, you may be eligible to receive the Canada Education Savings Grant (CESG) that will match 20% of the first $2,500 in annual contributions – to a maximum grant of $500 ($2,500 x 20%) per beneficiary, per year. That a bunch of free government money! I would strongly consider contributing to the RESP by December 31st if you haven’t already maximized your contributions year to date. Remember the RESP is a tax-deferred plan. Eventually contributions within the RESP will be taxed in your child’s or grandchild’s hands, but I doubt they’ll have tax rate as you when benefits are realized from the account.
Get a copy of The Grumpy Accountant with a huge discount!
Neal is no Grinch! Thanks to Neal, all My Own Advisor readers receive a massive discount with no expiration off The Grumpy Accountant.
Just include the promo code “MOA” when you purchase the full PDF e-book from Neal’s site.
In doing so, you’ll get a whopping 30% discount!
Disclosure – My Own Advisor is not a tax whiz however I have learned many tax tips over time. This post does not include any personal tax advice. If ever in doubt about any tax strategies for your situation please consult a tax professional before making any major financial decision.